Society 31 March 2020

Can new taxes, handouts and a holiday soften Russia’s economic pain?

As the U.S. passed a $2.2 trillion legislation package this week to help those hit by the coronavirus, Russian President Vladimir Putin also unveiled a raft of emergency economic measures. Putin promised financial help for business owners, but simultaneously hit them with the burden of a nationwide, week-long paid holiday, and new taxes. Russia is the only country in the world to introduce populist taxes in response to the pandemic: the government will spin them as a levy on the wealthy, but the middle class will also be squeezed.

Putin announced the crisis plan Wednesday in a televised address, shortly after he donned a hazmat suit to visit a Moscow clinic treating COVID-19 patients. The main measures were:

  • New welfare handouts. Families with small children will receive 5,000 rubles ($65) per month during the crisis. Payments for those registered as unemployed will be increased by the same amount, making total unemployment benefits equal to the minimum wage of 12,100 rubles a month. If you suffer a 30 percent or more drop in income, you will also be allowed to defer credit payments.
  • The major blow to business was the announcement that next week will not be a working week, but employees will receive full salaries, and employers will not be compensated. Officials have said that, in Moscow, the week-long holiday may be extended for another week.
  • Small and medium-sized businesses were promised several handouts, most importantly — a reduction in employee contributions from 30 percent to 15 percent, and a half-year tax holiday (except on VAT). Small companies in difficult positions will be offered a half-year reprieve on credit payments.
  • New taxes. Not only will there be a 13 percent tax on the interest earned on bank deposits and bonds worth over 1 million rubles, but Putin threatened to withdraw from tax treaties if foreign governments interfered with a new 15 percent tax on interest and dividend payments that leave the country via offshore holdings.

With these taxes, the government is attempting to present itself as redistributing wealth in a time of crisis, although, in reality, only the second measure is ‘a tax on the wealthy’. In order to maintain the illusion, Putin had to get creative with the numbers.

  • In his address, Putin said that the income tax on deposits will affect less than 1 percent of overall deposits. The next day, the rhetoric changed: his press secretary Dmitry Peskov said this would actually be “less than 10 percent”. In reality, the official statistics show that such deposits comprise 55 percent of the banking system, and $12,500 is a relatively common amount to have in a savings account.
  • At the same time, Putin exaggerated the importance of the second new tax, on owners of offshore companies. While he said these people currently pay a 2 percent tax in Russia, in actual fact, owners using Cypriot companies pay a Russian tax of 5 percent, and those with offshore entities in other countries pay 10 percent.
  • Both taxes will be introduced no earlier than next year, and have no direct connection to the coronavirus. Most analysts agreed that Putin was simply using the situation to announce unpopular measures (after VAT rises in 2018, Putin pledged there would be no increase in the tax burden on businesses before 2024).

The new taxes didn’t cause much of a fuss, mainly because small companies are not focused on tax optimization, but on survival. For service sector companies, mass layoffs are unavoidable in the current crisis, even if Russian labor law makes this risky and expensive. At the beginning of this week, Prime Minister Mikhail Mishustin warned companies over resorting, but if you can’t let employees go and you aren’t making any money, how can you pay them salaries? Long delays in salary payments in Russia are a criminal offense.

Putin met Thursday with business owners and the hero of the meeting was the owner of popular Moscow cafe chain, Anastasia Tatulova. She almost cried during her speech:

“I will try to ask you [this question] without tears, but it is a real tragedy, an absolute tragedy… You should not promise to send in the prosecutors if we fire people. In actual fact, I don’t care any longer: if I do one thing, it’s criminal charges; if I do another it’s criminal charges; and if I do nothing then I’m bankrupt.”

There are no reliable estimates yet of the impact of the coronavirus on the economy, but 20 percent of companies plan (Rus) to cut salaries, and 30 percent have already done so.

Why the world should care

Private businesses outside the natural resources sector are always the first victim of any crisis in Russia. There is little doubt that the state’s share in the economy will grow as stricter measures are required to manage the pandemic and the economic downturn accelerates.

Howard Amos